Lock in Home Office Deductions
The tax law permits you to deduct home office expenses if you "regularly and exclusively" use an area of your home as either:
Another Tax Break
Years ago, the IRS issued regulations on home sales that allow people who work out of their home offices to pocket more of the home sale gain exclusion. For single taxpayers, the maximum eligible amount is $250,000 and for married couples filing jointly, it is $500,000.(Treasury Decision 9030)
However, this tax break is subject to a recapture provision. You must forfeit the exclusion for the part of the gain attributable to depreciation deductions allowed for the home office after May 6, 1997. Consult with your tax advisor for more details.
Your principal place of business.
A place to meet or deal with clients, customers or patients in the normal course of business.
These restrictions mean that no personal activities can be conducted from a deductible home office. If you qualify to take write-offs, you can deduct a proportionate share of expenses including mortgage interest, depreciation deductions, utilities, insurance, security systems and repairs.
The IRS often challenges home office deductions. To protect yourself in case of an IRS audit, keep good records. It also helps to take photos of the room to help prove it was used for business purposes.
Here are a few more tips concerning home offices.
To figure the percentage of your home used for business, you can use the most advantageous of two methods — square footage or the number of rooms.
Even if you don't qualify for the deduction, you might be able to get a write-off for the expenses involved in storing inventory or product samples in a room in your home.
Home office deductions can't exceed your income. But if your expenses and deductions are greater, you can carry the loss forward to a future year.
If a home office is required by an employer, it's a good idea for the employee to get a written statement from the company explaining the requirement. Another option is to have the requirement included in an employment contract. To be deductible, the home office of an employee must be for the convenience of the employer.
Consult with your tax advisor if you have any questions about home office tax breaks.